What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-03-17 compared with 2021-03-11 · 317 added, 306 removed, 50 unchanged (93% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion of the financial condition and results of operations of Aerpio Pharmaceuticals, Inc.

should be read in conjunction with the consolidated financial statements and the notes to those statements included in this Annual Report on Form 10-K for the year ending December 31, 2020.

The following discussion of our financial condition and results of operations of Aadi Bioscience, Inc.

should be read in conjunction with the consolidated financial statements and the related notes to those statements thereto appearing elsewhere in this Annual Report for the year ending December 31, 2021.

Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risk, uncertainties and assumptions.

As a result of many factors, including those factors set forth in the “Risk Factors” section of this Annual Report on Form 10-K our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Please also refer to the section under the heading “Note Regarding Forward-Looking Statements.”

Operating Overview

Aerpio Pharmaceuticals, Inc.

is a biopharmaceutical company focused on developing compounds that activate Tie2 as well as other indications in which the Company believes that activation of Tie2 may have therapeutic potential.

Our product candidates include razuprotafib (formerly known as AKB-9778), a small molecule VE-PTP inhibitor.

In March 2019, we announced topline results from our Phase 2b (“TIME-2b”) clinical trial of AKB-9778 for the treatment of non-proliferative diabetic retinopathy.

Although the results did not meet the study’s primary endpoint, we believe that the TIME-2b study further supported the reduction of intraocular pressure (“IOP”) seen with subcutaneous razuprotafib in the previous TIME-2 study.

Based on these findings, we developed a topical ocular formulation of razuprotafib, and observed in preclinical studies activation of Tie2 in Schlemm’s canal, IOP reduction via enhanced outflow facility and favorable tolerability.

In June 2019, we initiated a double-masked, multiple-ascending dose Phase 1b clinical trial for open angle glaucoma (“OAG”).

We enrolled four cohorts of 12 subjects each and subjects received increasing daily doses of a topical ocular formulation of razuprotafib or placebo for seven days.

The primary endpoint of the trial was ocular safety and tolerability, with IOP lowering as the key pharmacodynamic endpoint.

In October 2019, we announced interim results from our Phase 1b clinical trial.

The unmasked interim analysis, limited to the first three cohorts, showed the topical ocular administration of razuprotafib was well tolerated.

Compared to placebo, there was a dose dependent increase in minimal to mild conjunctival hyperemia with razuprotafib, which was transient and generally considered non-adverse, and a time and dose dependent reduction in IOP that, in the highest once daily (“QD”) dose cohort peaked at 4 hours post-dose and was sustained through eight hours on day 7, returning to baseline levels at 24 hours post-dose.

Based on these data, a cohort of 43 patients with ocular hypertension (“OHT”)/OAG (hypertensive eyes) was added to the ongoing study to assess safety and pilot efficacy in the target patient population.

In January 2020, we announced the results of the fifth cohort of subjects noting subjects in cohort five randomized to the active arm exhibited statistically significant decreases in IOP at all post razuprotafib administration time points on both days 1 and 7 compared with day -1 baseline values when they were being treated with prostaglandin alone.

When the change is placebo-corrected, razuprotafib plus prostaglandin versus prostaglandin alone produced a statistically significant decrease in IOP on Day 7 at 0, 4 and 8 hours post dose as compared to placebo.

We believe these results suggest a persistent IOP-lowering activity from adding razuprotafib to standard-of-care prostaglandin therapy.

Topical ocular administration of razuprotafib was well tolerated over seven days in cohort five.

There were no reports of conjunctival hemorrhage or pain on instillation during the seven days of dosing and no systemic/non-ocular AEs were observed.

Based on the preclinical proof of concept and the results of the Phase 1b trial showing a reduction in IOP in patients with OHT and OAG, we initiated a Phase 2 clinical trial in June 2020 designed to evaluate the safety and efficacy of a topical formulation of razuprotafib in approximately 195 patients followed over a 28-day period.

Patients enrolled in the trial will be administered a baseline of latanoprost ophthalmic solution 0.005%, and then randomized in a 1:1:1 fashion to receive adjunctive therapy consisting of placebo, 40 mg/ml razuprotafib once-daily, or 40 mg/ml razuprotafib twice-daily.

The primary endpoint of the study is mean diurnal IOP at 28 days in the razuprotafib treated groups compared to the latanoprost monotherapy group

In December 2020, we reported that r azuprotafib met the primary efficacy endpoint at Day 28 with the twice-daily (“BID”) dose group in our double-blind, placebo-controlled Phase 2 trial in patients with elevated IOP associated with OAG or OHT.

The change from baseline in diurnal mean IOP at Day 28 of study eyes treated with razuprotafib BID plus latanoprost showed a statistically significant improvement, or drop in IOP, (two-sided p-value 0.0130 and LS mean difference of -0.92 mm Hg) compared to those treated with latanoprost monotherapy.

The razuprotafib once-daily (“QD”) dose group did not show a statistically significant improvement at Day 28.

Further analysis of the results demonstrated that razuprotafib had a larger IOP reduction after longer duration dosing (28 days versus 14 days) consistent with its potential mechanism of repairing Schlemm’s canal.

Razuprotafib also produced larger IOP reductions in patients with higher starting IOP, or a 1.6 mmHg IOP reduction in patients with post wash-out IOP’s of >26 mmHg and the topical drops were well tolerated in this trial.

While the trial met the primary efficacy endpoint at Day 28 with the BID group, the IOP decrease was not at a level deemed sufficient to move to Phase 3 development.

Therefore, f ollowing the announcement regarding the topline results from the Phase 2 clinical trial of razuprotafib in patients with elevated IOP associated with OAG or OHT, we initiated a process to explore a range of strategic alternatives focused on maximizing stockholder value from our clinical assets and cash resources.

As part of this process, we are exploring strategic options for partnering our programs, as well as the potential for an acquisition, company sale, merger, business combination, asset sale, in-license, out-license or other strategic transaction.

There can be no assurance that this exploration of strategic alternatives will result in the Company entering or completing any transaction.

Ladenburg Thalmann & Co.

and Duane Nash, M.D., J.D., M.B.A, have been retained with respect to the strategic review process.

In January 2021, we executed a realignment plan to reduce operating costs and better align our workforce with the needs of our ongoing business.

The realignment plan reduces our current workforce by 7 employees, representing approximately 58% of our workforce.

As a result of this realignment plan, we estimate that we will incur one-time employee related severance expenses of approximately $1.2 million in the first quarter of 2021.

We anticipate the majority of the one-time employee severance liability to be paid during 2021.

The charges that we expect to incur in connection with the realignment plan are subject to a number of assumptions, and actual results may differ from our original estimate.

We may also incur additional costs not currently contemplated due to events that may occur as a result of, or that are associated with, the realignment plan.

Acute Respiratory Distress Syndrome

Based on results in preclinical studies and observations in patients in TIME-2 and TIME-2b trials, we believe that a vascular endothelial receptor, Tie2, may play a pivotal role in the defense against microvascular breach in ARDS.

We hypothesize that razuprotafib, our lead Tie2 activator, may have therapeutic potential for the treatment of COVID-19 associated ARDS and initiated two Phase 2 trials during 2020.

In May 2020, we were selected by Quantum Leap Healthcare Collaborative to participate in the I-SPY COVID Trial (Investigation of Serial studies to Predict Your COVID Therapeutic Response with biomarker Integration and Adaptive Learning ) to evaluate subcutaneous razuprotafib for the treatment of COVID-19 related ARDS in adult patients with critical COVID-19 (ClinicalTrials.gov Identifier:

NCT04488081).

The trial was initiated during the third quarter of 2020 but in January 2021, the Data Monitoring Committee recommended discontinuation of razuprotafib after 21 patients due to the complexity of monitoring patients in the setting of a surge in ICU patients.

There were no apparent safety signals associated with razuprotafib in these 21 patients and we believe the scientific basis is sound for continuing to evaluate the drug in patients presenting with ARDS across a broader array of infections.

In August 2020, we announced the receipt of funding to evaluate subcutaneous razuprotafib in a new randomized, investigational trial for the prevention and treatment of ARDS in adult patients with moderate to severe COVID-19 (“RESCUE” trial;

ClinicalTrials.gov Identifier:

NCT04511650).

The RESCUE trial will evaluate subcutaneous razuprotafib for the prevention and treatment of ARDS in adult patients with moderate to severe COVID-19 as part of the MTEC-20-09-COVID-19 Treatment Military Infectious Disease Research Program (“MIDRP”).

The Medical Technology Enterprise Consortium (“MTEC”), a non-profit organization primarily funded by the U.S.

Army Medical Research and Development Command, will provide up to $5.1 million of reimbursement related to qualified internal and external spending of the Company, as it relates to the clinical trial.

The RESCUE clinical trial was initiated during the third quarter of 2020 but we decided to stop recruiting in February 2021 after the first 31 patients were enrolled based on challenges recruiting and monitoring patients in the current pandemic environment.

There were no apparent safety signals associated with dosing COVID-19 patients in the RESCUE trial and we plan to further analyze the data to assess trends in efficacy and biomarkers.

We expect to report top-line data in the second quarter of 2021.

Diabetic Kidney Disease

In two consecutive trials, TIME-2 and TIME-2b, subcutaneous razuprotafib showed reduction in Urine Albumin-Creatinine Ratio (“UACR”), a measure of progression of diabetic kidney disease.

In a post-hoc analysis of the earlier TIME-2 clinical trial, there was a 21% reduction (geometric mean) in UACR from baseline in the razuprotafib treatment arms, but an overall increase in UACR in the placebo arm.

The prospective UACR analyses from the recently completed TIME-2b trial largely replicated the results from the previous trial and reinforced the potential beneficial effects of Tie2 activation in diabetic kidney disease.

We believe that systemic treatment with razuprotafib could have the potential to change the treatment paradigm for diabetics in the future and potentially address a major societal problem by lowering the cost of care associated generally with diabetes.

ARP-1536 and Bi-specific Antibody

ARP-1536, our humanized monoclonal antibody directed at the same target as subcutaneous razuprotafib, is in preclinical development.

We are evaluating development options for ARP-1536, including subcutaneous injection for the treatment of diabetic vascular complications, e.g., diabetic nephropathy and intravitreal injection as an adjunctive therapy for diabetic macular edema.

We are also developing a bispecific antibody that binds both v ascular endothelial growth factor (“VEGF”) and v ascular endothelial protein tyrosine phosphatase (“VE-PTP”) which is designed to inhibit VEGF activation and activate Tie2.

We believe this bispecific antibody has the potential to be an improved treatment for wet AMD and diabetic macular edema via intravitreal injection.

Gossamer License Agreement

In June 2018, we licensed AKB-4924, a selective stabilizer of hypoxia-inducible factor-1 alpha (“HIF-1 alpha”) to Gossamer Bio, Inc.

(“Gossamer”) AKB-4924, (now called GB004), is being developed for the treatment of inflammatory bowel disease (“IBD”).

HIF-1 alpha is involved in mucosal wound healing and the reduction of inflammation in the gastrointestinal tract.

Gossamer has completed the Phase 1 multiple ascending dose (“MAD”) clinical study and is currently running a Phase 1b clinical study in ulcerative colitis (“UC”) patients.

Gossamer has progressed GB004 during 2019 by completing the Phase 1 trial in healthy volunteers and initiating a Phase 1b study in ulcerative colitis patients of 28-day duration.

Gossamer reported topline results from the Phase 1b study in the second quarter of 2020 and announced that, subject to developments in the ongoing COVID-19 pandemic, it initiated a 12-week Phase 2 study of GB004 in patients with mild-to-moderate UC in the second half of 2020.

Gossamer is responsible for all remaining development and commercial activities for GB004.

Our primary source of liquidity to date has been through public and private sales of our common stock, redeemable convertible preferred stock, convertible debt and the proceeds from a license agreement entered into with Gossamer (the “Gossamer License Agreement”), as amended by that certain Amendment No.

1 to the Gossamer License Agreement (“Amendment No.

1” and together with the Gossamer License Agreement, as amended by Amendment No.

1, the “Amended Gossamer License Agreement”).

For the year ended December 31, 2020, we generated $15.0 million in revenue pursuant to Amendment No.

We will need to raise additional funds to further advance our clinical research programs, commence additional clinical trials and commercialize our products, if approved.

While we continue to pursue financing alternatives, which may include equity financing, business development arrangements, licensing arrangements and business combination transactions, financing may not be available to us in the necessary time frame, in the amounts that we need, on terms that are acceptable to us or at all.

If we are unable to raise the necessary funds when needed or reduce spending on currently planned activities, we may not be able to continue the development of our product candidates or we could be required to delay, scale back or eliminate some or all of our development programs and other operations and will materially harm our business and consolidated financial position.

We expect to continue to incur significant expenses and operating losses for the foreseeable future as a result of our ongoing activities.

We are subject to a number of risks similar to other life science companies in the current stage of our life cycle, including, but not limited to, the need to obtain adequate additional funding, possible failure of preclinical testing or clinical trials, competitors developing new technological innovations, and protection of

proprietary technology.

If we do not successfully mitigate any of these risks, we will be unable to generate revenue or achieve profitability.

Except for the Amended Gossamer License Agreement that we entered into with Gossamer in June 2018 and amended in May 2020, our operations to date have been limited to organizing and staffing our Company, business planning, raising capital, acquiring and developing our technology, identifying potential product candidates and undertaking preclinical and clinical studies.

There can be no assurance of future revenues either from future payments related to the Amended Gossamer License Agreement, transition services or from our product candidates.

Our product candidates are subject to long development cycles, and there is no assurance we will be able to successfully develop, obtain regulatory approval for, or market our product candidates.

As of December 31, 2020, we had an accumulated deficit of $146.6 million and anticipate incurring additional losses for the next several years.

The Company’s inability to obtain required funding in the near future could have a material adverse effect on its operations and strategic development plan for future growth.

If the Company cannot successfully raise additional capital and implement its strategic development plan, its liquidity, financial condition and business prospects will be materially and adversely affected, and the Company may have to cease operations.

Based on the Company’s current cash reserves of $42.6 million at December 31, 2020 and financial condition as of this Annual Report on Form 10-K, we believe our existing cash and cash equivalent will be sufficient to fund currently planned operations through the fourth quarter of 2022.

The Company is currently evaluating a range of strategic alternatives focused on maximizing stockholder value from our clinical assets and cash resources.

There can be no assurance that this exploration of strategic alternatives will result in the Company entering or completing any transaction.

COVID-19 Considerations:

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19, as a global pandemic, which continues to spread throughout the United States and around the world.

The COVID-19 pandemic is evolving, and to date has led to the implementation of various responses, including government-imposed quarantines, stay-at-home orders, travel restrictions, mandated business closures and other public health safety measures.

In addition, in response to the spread of COVID-19, we have continued to keep our executive offices closed with our employees continue to work outside of our offices.

We are closely monitoring the impact of COVID-19 on all aspects of our business, including how it may impact our planned Phase 2 clinical trial for our glaucoma program, expected timelines and costs on an ongoing basis.

We do not yet know the full extent of potential delays or the impact on our business, our planned clinical trial, our research programs, healthcare systems or the global economy and we cannot presently predict the scope and severity of any potential business shutdowns or disruptions.

The extent to which COVID-19 ultimately impacts our business, results of operations and financial condition will depend on future developments, which remain highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, new information that may emerge concerning the severity of COVID-19 or the effectiveness of actions to contain COVID-19 or treat its impact, among others.

While some states and jurisdictions have started to rollback stay-at-home orders, quarantines and similar restrictions and reopened in phases, the regulations vary on a state by state basis and the impact of loosening of those restrictions is not yet known.

If we or any of the third parties with whom we engage were to experience additional shutdowns or other prolonged business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could have a material adverse impact on our business, results of operation and financial condition.

In addition, a recurrence of COVID-19 cases could cause other widespread or more severe impacts depending on where infection rates are highest.

We continue to monitor developments as we deal with the disruptions and uncertainties relating to the COVID-19 pandemic.

Our actual results could differ materially from those discussed in our forward-looking statements for many reasons, including those risks.

You should not place undue reliance on these forward-looking statements, which apply only as of the date of this Annual Report.

You should read this Annual Report completely, including the “Risk Factors” section under Part I, Item 1A of this Annual Report and the “Forward-Looking Statements” sections of this Annual Report for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by our forward-looking statements contained in the following discussion and analysis.

Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

We are a biopharmaceutical company focused on developing and commercializing precision therapies for genetically defined cancers with alterations in mTOR pathway genes.

Our lead drug product, FYARRO, nab -sirolimus, (sirolimus protein-bound particles for injectable suspension (albumin-bound)), is a form of sirolimus bound to albumin.

Sirolimus is a potent inhibitor of the mTOR biological pathway, the activation of which pathway can promote tumor growth, and inhibits downstream signaling from mTOR.

In May 2021, we completed the filing of a rolling new drug application (“NDA”) for FYARRO to the U.S.

Food and Drug Administration (the “FDA”), for approval to treat patients with advanced malignant PEComa.

The FDA accepted the NDA in July 2021 and granted us priority review designation with a Prescription Drug User Fee Act target action date in November 2021.

The NDA was based on results from our Phase 2 registrational study, AMPECT (Advanced Malignant PEComa Trial), in advanced malignant PEComa.

In November 2021, the FDA approved FYARRO sirolimus protein-bound particles for injectable suspension (albumin-bound) for intravenous use for the treatment of adult patients with locally advanced malignant PEComa.

During the first quarter of 2022, we launched FYARRO in the United States for treatment of advanced malignant PEComa.

In addition to advanced malignant PEComa, based on data from the completed AMPECT trial and our expanded access program, we have initiated a registration-directed tumor-agnostic Phase 2 study (“PRECISION 1”) of FYARRO in patients with Tuberous Sclerosis Complex 1 and 2 ( TSC1 & TSC2 ) alterations.

We have completed a Type B meeting with the FDA in which we discussed the initial trial design and the PRECISION 1 trial was opened for enrollment in the first quarter of 2022 in the United States.

For more information regarding our business, including FYARRO, the AMPECT trial and the PRECISION 1 trial, see Part I, Item 1 (Business).

For the fiscal year ended December 31, 2021, we recorded revenue of $1.1 million and net loss of $110.1 million.

See “Results of Consolidated Operations” for further discussion of our results.

August 2021 Reverse Merger

On May 16, 2021, at which time we were operating as “Aerpio Pharmaceuticals, Inc.,” we entered into:

(i) an Agreement and Plan of Merger (“Merger Agreement”) with Aspen Merger Subsidiary, Inc., our wholly-owned subsidiary (“Merger Sub”), and Aadi Subsidiary, Inc.

(formerly known as Aadi Bioscience, Inc.

(“Private Aadi”));

and (ii) a subscription agreement (“Subscription Agreement”) with certain investors (the “PIPE Investors”), pursuant to which we agreed to sell shares of our common stock to the PIPE Investors concurrently with the closing of the Merger (as defined below) (the “PIPE Financing”).

See Note 1 to our audited financial statements for more information about the Merger Agreement and the Subscription Agreement.

On August 26, 2021, pursuant to the terms of the Merger Agreement and the Subscription Agreement:

Merger Sub merged with and into Private Aadi, with Private Aadi surviving as our wholly-owned subsidiary (the “Merger”);

in connection with and immediately prior to the Merger, we effected a reverse stock split of our common stock at a ratio of 15:1 and changed our name from “Aerpio Pharmaceuticals, Inc.” to “Aadi Bioscience, Inc”;

at the effective time of the Merger, based on an exchange ratio of 0.3172 (after taking into account the Reverse Stock Split), as calculated under the Merger Agreement (the “Exchange Ratio”), we issued an aggregate of 5,776,660 shares of common stock to the holders of Private Aadi common stock immediately prior to the Merger, including shares of Private Aadi common stock issuable upon the conversion of all shares of preferred stock and convertible promissory notes outstanding immediately prior to the Effective Time;

at the closing of the Merger, we assumed all of the outstanding and unexercised options to purchase shares of Private Aadi common stock, which options were converted into options to purchase shares of our common stock, as adjusted pursuant to the Merger Agreement based on the Exchange Ratio;

concurrently with the Closing of the Merger, we issued and sold 11,852,862 shares of common stock to the PIPE Investors for total gross proceeds of $155 million and, immediately after the closing of the Merger and the PIPE Financing, the PIPE Investors and the Private Aadi investors as of immediately prior to the effective time of the Merger owned 55.6% and 29.2%, respectively, of our outstanding common stock on a fully-diluted basis;

we entered into a contingent value rights agreement (“CVR Agreement”) pursuant to which each of our stockholders as of immediately prior to the effective time of the Merger became entitled to certain contingent value rights entitling them to receive 90% of the net proceeds (calculated as gross consideration minus certain permitted deductions), if any, received by us under the license agreement, dated June 24, 2018, with Gossamer Bio, Inc., as amended, and certain other covered agreements, as specified in the CVR Agreement (see Note 1 to our audited financial statements for more information about the CVR Agreement).

Celgene License Agreement

In April 2014, Private Aadi entered into a license agreement (the “Celgene License Agreement”) with Abraxis BioScience, LLC, a wholly owned subsidiary of Celgene Corporation, now Bristol Myers Squibb Company (“Celgene”), for exclusive rights for certain patents and a non-exclusive license for certain technology and know-how pertaining to ABI-009 (which we refer to as FYARRO).

Under the Celgene License Agreement, as amended, Celgene is entitled to receive certain development milestone payments, royalties on net sales from licensed products under the agreement and any sublicense fees.

No payments related to milestones or royalties under this agreement were paid during the twelve months ended December 31, 2021 and December 31, 2020.

See Note 2 to the audited financial statements for more information about the Celgene License Agreement.

Under the terms of an August 2021 amendment to the Celgene License Agreement, we paid Celgene $5.8 million, representing 50% of the previously outstanding payment obligation under the terms of the Celgene License Agreement, following the effective time of the PIPE Financing.

Pursuant to the terms of the amendment, the remaining portion of the previously outstanding payment obligation ($5.8 million), which is recorded on our balance sheet as a “payable to related party,” is due on the third anniversary of the effective time plus any accrued and unpaid interest due thereon.

EOC License Agreement

In December 2020, we entered into a license agreement (“EOC License Agreement”) with EOC Pharma (Hong Kong) Limited (“EOC”) under which we received $14.0 million in January 2021 in non-refundable upfront consideration as partial payment for the rights and licenses granted to EOC by us for the further development and commercialization of FYARRO in the People’s Republic of China, Hong Kong Special Administration Region, Macao Special Administrative Region and Taiwan (the “Licensed Territory”).

See Note 8 to the audited financial statements for more information about the EOC License Agreement.

In accordance with the Celgene License Agreement, we are required to pay 20% of all sublicense fees to Celgene.

As such, we recognized $2.8 million of license expense in the fourth quarter of 2020 and had a corresponding $2.8 million sublicense payable to Celgene on the balance sheet as of December 31, 2020, which was paid in 2021.

During the fourth quarter of 2021, we recognized license revenue and received $1.0 million from EOC for achieving the FDA approval milestone in November 2021.

In accordance with the Celgene License Agreement, we recognized $0.2 million of license expense in the fourth quarter of 2021 and had a corresponding $0.2 million sublicense payable to Celgene on the balance sheet as of December 31, 2021, which was paid in 2022.

Key Trends and Factors Affecting Comparability Between Periods

Following FDA approval in November 2021, we have been actively engaged in commercial preparations to support the U.S.

launch of FYARRO for the treatment of patients with advanced malignant PEComa.

We have built a cross-functional commercial team consisting of marketing, market access, commercial operations, and sales to support our launch and are building a commercial infrastructure with capabilities designed to scale when necessary to support future commercial launches.

Expenses related to our commercial launch including personnel expenses, sales support, and marketing are included in general and administrative expenses for the year ended December 31, 2021.

We expect these expenses will continue to increase as we launch FYARRO and support future launches.

We expect that our research and development costs will increase in 2022 relative to 2021 as a result of anticipated significant expenses related to the PRECISION 1 trial.

Following the Merger, we have incurred, and expect to continue to incur, significant additional expenses associated with being a public company that we did not incur as a privately-held company, including (i) costs to comply with the rules and regulations of the SEC and those of Nasdaq, (ii) legal, accounting and other professional services, (iii) insurance, (iv) investor relations activities and (v) other administrative and professional services.

We accounted for the Merger as a reverse asset acquisition because substantially all of the fair value was concentrated in cash, working capital, and a long-lived contract intangible asset.

Due to the significant excess purchase price being allocated over the fair value of the acquired contract intangible asset, we determined that an indicator of impairment was present and recognized in 2021 a non-cash impairment charge of $74.2 million, to bring the carrying amount of the contract intangible asset down to its estimated fair value of $3.9 million.

The intangible asset is being amortized over the life of the underlying asset, 14.3 years.

The COVID-19 pandemic has resulted, and is likely to continue to result in, significant national and global economic disruption and may adversely affect our operations.

Our clinical trials have been, and may continue to be, affected by the closure of offices, lack of resources or closure of borders, among other measures being put in place around the world.

The inability to travel and conduct face-to-face meetings, as well as constraints surrounding hospital infrastructure and staff, can also make it more difficult to enroll and maintain patients in ongoing or planned clinical trials.

We are actively monitoring the impact of COVID-19 and the possible effects on our financial condition, liquidity, operations, suppliers, industry and workforce.

However, the full extent, consequences and duration of the COVID-19 pandemic and the resulting impact on us cannot currently be predicted.

We will continue to evaluate the impact that these events could have on our operations, financial position, results of operations and cash flows in fiscal year 2022.

Liquidity and Capital Resources

We have incurred net losses in each year since inception and as of December 31, 2021 we had an accumulated deficit of $142.7 million.

These losses have resulted principally from costs incurred in connection with research and development activities, general and administrative costs associated with our operations, and costs associated with the Merger.

We expect to continue to incur significant expenses and operating losses for the foreseeable future due to the cost of research and development, including identifying and designing product candidates and conducting preclinical studies and clinical trials, the regulatory approval process for our product candidates and the commercial launch of FYARRO.

As of December 31, 2021, we had $149.0 million of cash and cash equivalents.

Based on our current plans, we believe our existing cash and cash equivalents will enable us to conduct our planned operations into 2024.

Key M anagement C hanges

Upon the closing of the Merger, Neil Desai, Ph.D.

became our President and Chief Executive Officer.

Following the Merger, we appointed Brendan Delaney as our Chief Operating Officer (September 2021), Loretta M.

as our Chief Medical Officer (October 2021), and Scott Giacobello as our Chief Financial Officer (November 2021).

Additionally, in September 2021, we appointed Emma Reeve to serve as a Class III director and as Chair of the Audit Committee.

Basis of Presentation

The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the consolidated balance sheets and the consolidated statements of operation and comprehensive loss presented herein.

The following discussion and analysis are based on our consolidated financial statements contained in this Annual Report on Form 10-K, which we have prepared in accordance with U.S.

generally accepted accounting principles (“U.S.

GAAP” or “GAAP”).

The following discussion highlights our results of operations and the principal factors that have affected our financial condition as well as our liquidity and capital resources for the periods described and provides information that management believes is relevant for an assessment and understanding of the consolidated balance sheets and statements of operation and comprehensive loss presented herein.

The following discussion and analysis are based on our consolidated financial statements contained in this Annual Report, which we have prepared in accordance with U.S.

generally accepted accounting principles (“GAAP”).

You should read the discussion and analysis together with such consolidated financial statements and the related notes thereto.

Components of Consolidated Statements of Operations and Comprehensive Loss

License Revenue, and Other

License revenue relates to the Gossamer License Agreement.

Components of Statements of Operations and Comprehensive Loss

EOC Pharma License Revenue

In December 2020, we entered into the EOC License Agreement with EOC pursuant to which, we granted EOC exclusive rights to develop and commercialize FYARRO in the Licensed Territory for human use in specified indications.

EOC is obligated to pay royalties to us on sales of licensed products in the Licensed Territory.

Under the terms of the EOC License Agreement, EOC has agreed to use commercially reasonable efforts to develop and commercialize FYARRO in the Licensed Territory and to obtain and maintain regulatory approval.

Unless earlier terminated, the EOC License Agreement will remain in effect until all milestones are achieved and royalty payment obligations are fulfilled as provided for in the EOC License Agreement.

Prior to the expiration of the EOC License Agreement, EOC has the right to terminate the agreement for any reason upon a specified number of days advance written notice.

Either party may terminate the EOC License Agreement in the event that the other party materially breaches the agreement and fails to cure the breach, or experiences certain events of financial distress.

We may terminate the EOC License Agreement if EOC or its affiliates challenge the licensed patents in a legal, administrative or arbitration proceeding.

In December 2020, we recognized revenue of $14.0 million related to the upfront payment which was paid in January 2021.

We are eligible to receive up to an additional $257.0 million in the aggregate upon achievement of certain development, regulatory and sales milestones, as well as tiered royalties on net sales in the Licensed Territory, which royalties are potentially subject to various reductions.

EOC is responsible for controlling the filing for and obtaining all regulatory approvals, with our reasonable cooperation, and for bearing all costs associated with those approvals.

In November 2021, we achieved the FDA approval milestone and recognized $1.0 million of revenue, which was paid in December 2021.

We assessed the EOC License Agreement and concluded that EOC is a customer.

Additionally, we identified the license of FYARRO provided to EOC as the sole performance obligation.

The $14.0 million upfront payment received from EOC is non-refundable and non-creditable and is considered fixed consideration.

Both the milestones and royalty payments under the EOC License Agreement are considered variable consideration and, with respect to revenue recognition, are constrained until we receive notification from EOC that the milestones and royalty payments have been achieved.

Grant Revenue

Grant revenue is derived from federal grants, primarily with the FDA.

We have determined that the government agencies providing grants to us are not customers.

Grant revenue is recognized when there is reasonable assurance of compliance with the conditions of the grant and reasonable assurance that the grant revenue will be received.

We recognize grant revenue as reimbursable grant costs are incurred.

The costs associated with these reimbursements are reflected as a component of research and development expense in the accompanying statements of operations and comprehensive loss.

With respect to grant revenue derived from reimbursement of direct out-of-pocket expenses for research costs associated with federal contracts, where we act as principal with discretion to choose suppliers, bear credit risk and perform part of the services required in the transaction, we record revenue for the gross amount of the reimbursement .

The costs associated with these reimbursements are reflected as a component of research and development expense in the accompanying statements of operations and comprehensive loss.

Operating Expenses

Research and Development Expenses

Research and development expenses are expensed as incurred.

Research and development expenses consist primarily of (i) employee-related expenses, including salaries, benefits, travel, and stock-based compensation expense, (ii) external research and development expenses incurred under arrangements with third parties, such as contract research organizations (“CRO’s”) and consultants, (iii) the cost of acquiring, developing, and manufacturing clinical study materials, and (iv) costs associated with preclinical, clinical and regulatory activities.

Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors and clinical sites.

Research and development expenses, which consist primarily of costs associated with our product research and development efforts, are expensed as incurred.

Research and development expenses consist primarily of:

(i) employee related costs, including salaries, benefits and stock-based compensation expense for employees engaged in scientific research and development functions;

(ii) third-party contract costs relating to research, formulation, manufacturing, nonclinical studies and clinical trial activities;

(iii) external costs of outside consultants who assist with technology development, regulatory affairs, clinical development and quality assurance ;

(iv) payments made under our third-party licensing agreements;

and (v) allocated facility-related costs.

Costs for certain activities, such as manufacturing, nonclinical studies and clinical trials are generally recognized based on the evaluation of the progress of completion of specific tasks using information and data provided by our vendors and collaborators.

Research and development activities are central to our business.

We expect to increase our investment in research and development in order to advance our product candidates through clinical trials.

As a result, we expect that our research and development expenses will increase substantially in the foreseeable future as we continue to invest in research and development activities, pursue clinical development of our product candidates and expand our product candidate pipeline.

The process of commercialization and conducting the necessary preclinical and clinical research to obtain regulatory approval is costly and time-consuming.

Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials.

Accordingly, to the extent that our product candidates continue to advance into clinical trials, including larger and later-stage clinical trials, our expenses will increase substantially and may become more variable.

General and Administrative Expenses

General and administrative expenses consist primarily of compensation and related costs for our finance, human resources and other administrative personnel, including stock-based compensation, employee benefits and travel.

In addition, general and administrative expenses include third-party consulting, legal, patent, audit, accounting services and facilities costs.

We expect to continue to incur general and administrative expenses due to additional legal, accounting, insurance, investor relations and other costs associated with being a public company, as well as other costs associated with our business.

Restructuring Expense

Restructuring expense consists primarily of severance related expenses of employees terminated as a result of our restructuring efforts.

Expenses include continued payroll, benefits and outplacement services (collectively “severance”) as defined and agreed upon by the respective employees’ severance agreement.

Severance is recognized as restructuring expense when employees are notified of the restructuring event with a corresponding restructuring accrual which was reduced as payments are made to the employees.

Other income represents reimbursed internal and external qualified expenses, per the terms of the MTEC arrangement, related to the ARDS RESCUE clinical trial.

Other income is recorded, and generally received, in the period the internal or external qualified clinical trial as we incur and pay expenses.

Grant income is recognized as earned based on contract work performed.

Interest Income

Interest income consists of interest income received on cash and cash equivalents.

General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, business development, sales and marketing, and other corporate functions.

Other general and administrative expenses include professional fees for legal, auditing, tax and business consulting services, insurance costs, intellectual property and patent costs, facility costs and travel costs.

We expect that general and administrative expenses will increase in the future as we expand our operating activities.

Additionally, we will incur significant additional expenses associated with being a public company that we did not incur as a privately-held company, including (i) costs to comply with the rules and regulations of the SEC and those of Nasdaq, (ii) legal, accounting and other professional services, (iii) insurance, (iv) investor relations activities and (v) other administrative and professional services.

Impairment of Acquired Contract Intangible Asset

Impairment of acquired contract intangible asset relates to a write down of the acquired contract intangible asset to fair value.

The contract intangible asset was assessed for recoverability using an undiscounted cash flow model, which resulted in undiscounted cash flows below the carrying amount.

We recognized an impairment of $74.2 million to bring the carrying amount of the contract intangible asset down to its estimated fair value of $3.9 million at August 26, 2021.

The fair value determination of the contract intangible asset was based upon a discounted cash flow valuation of the milestone payments and Monte Carlo valuation for the sales royalties.

Other Income (Expense), Net

Other income (expense) consists of the change in fair value of convertible promissory notes and interest expense related to such notes.

These expenses are partially offset by interest income earned on cash and cash equivalents and gain on extinguishment of debt.

During the year s ending December 31, 2021 and 2020 , we recognized state tax payments as income tax expense on the statement of operations and comprehensive loss .

Since our formation in 2011, we ha ve not recorded any U.S.

federal or state income tax benefits for the net losses we have incurred in each year or our earned tax credits, due to our uncertainty of realizing a benefit from those items.

Results of Consolidated Operations

The following tables set forth our results of operations:

The following table presents the results of operations for the periods indicated (amounts in thousands):

Years Ended December 31,

License revenue

Grant revenue

Total revenue

Operating expenses

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General and administrative

Restructuring expense

Impairment of acquired contract intangible asset

Total operating expenses

Loss from operations

Interest income

Total other income

Other income (expense), net

Loss before income taxes

Income tax expense

Net and comprehensive loss

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License Revenue

License revenue for the year ended December 31, 2020 of $15.0 million related to payment received as consideration pursuant to Amendment No.

1 of the Gossamer License Agreement.

This revenue was recognized when cash was received upon execution of Amendment No.

1 on May 12, 2020.

There were no milestones achieved related to the Gossamer License Agreement in 2020 or 2019.

No such license agreement amendment was executed in 2019.

License revenue for the years ended December 31, 2021 and 2020 relate to payments received from EOC Pharma as consideration pursuant to the License Agreement.

This revenue was recognized when earned.

During the year ended December 31, 2021, we recognized $1.0 million of revenue upon achieving the FDA approval milestone on November 22, 2021.

During the year ended December 31, 2020, we recognized $14.0 million of revenue, related to the non-refundable upfront payment for the rights and license granted to EOC for the further development and commercialization of FYARRO in the Licensed Territory.

Grant Revenue

Grant revenue amounts can vary from period to period depending on the funding and work performed.

Grant revenue decreased by $0.5 million for the year ended December 31, 2021, compared to the same period in 2020, primarily due to a decrease in the eligible expenses for grant reimbursement incurred during 2021 compared to 2020.

Operating Expenses

The following table sets forth our operating expenses:

Research and Development Expenses

The following table presents our research and development expenses for the periods indicated (amounts in thousands):

Years Ended December 31,

Research and development

General and administrative

Restructuring expense

Total operating expenses

Research and Development

Research and development expenses for the year ended December 31, 2020, decreased $0.2 million, or 1.8%, compared to the year ended December 31, 2019.

This was the result of decreased spending on clinical trials during 2020, specifically the Phase 2 program for glaucoma, and the I-SPY and RESCUE clinical trials, compared to the spending related to the completion of razuprotafib TIME-2b and glaucoma Phase 1b clinical trial during 2019.

General and Administrative

General and administrative expenses for the year ended December 31, 2020, decreased $1.0 million, or 10.2%, compared to the year ended December 31, 2019.

This decrease was primarily attributable to a decrease in employee related expenses of $0.7 million, legal expenses of $0.3 million and general office expenses of $0.8 million related to the Company’s restructuring efforts in 2019, offset by an increase in liability insurance of $0.3 million, consulting expense of $0.3 million and stock-based compensation of $0.2 million.

Restructuring Expense

Restructuring expenses for the year ended December 31, 2019 was $1.9 million and result of a reduction of headcount during 2019.

No such actions were taken during 2020.

The following table sets forth our other income:

Clinical drug product manufacturing expense

External clinical development expense

Personnel and other expenses

Total research and development expense

Research and development expenses for the year ended December 31, 2021 , were $19.7 million, an increase of $4.7 million, compared to $15.0 million for the year ended December 31, 2020 .

The increase was primarily driven by a $2.9 million increase in clinical drug manufacturing costs to prepare for our commercial launch of FYARRO, a $1.4 million increase for external clinical development, and a $3.0 million increase in headcount, consultants, and other expenses offset by a reduction of $2.6 million in license fee expense paid to Celgene.

General and Administrative Expenses

General and administrative expenses for the year ended December 31, 2021 , were $18.5 million, an increase of $16.4 million, compared to $2.1 million for the year ended December 31, 2020 .

The increase was primarily driven by the following in support of our increased headcount, preparation of our commercial launch and expenses related to being a public company.

We expect these expenses to continue to increase as we commercialize FYARRO and future launches:

$2.8 in personnel related expenses due to increased headcount, incentive bonuses and share-based compensation.

Sales and administrative headcount increased to 17 employees at December 31, 2021 from two employees at December 31, 2020;

$2.0 million of compensation related expenses to former Aerpio executives related to the Merger;

$3.6 million of consulting expenses to support the growth of the organization;

$5.4 million of commercialization readiness and marketing expenses;

and $2.6 million of legal, insurance and other office related expenses.

Impairment of Acquired Contract Intangible Asset

During the year ended December 31, 2021 , as a result of the excess fair value ascribed to the acquired contract intangible asset related to the Merger, we recorded a $74.2 million impairment charge to reduce the carrying value of the intangible asset to its fair value at August 26, 2021.

No impairments were recognized during the year ended December 31, 2020.

Other Income (Expense), Net

The following table sets forth our other income (expense), net:

Years Ended December 31,

Interest income

Total other income

Other income for the year ended December 31, 2020 of $1.8 million represents reimbursed internal and external qualified expenses related to the ARDS RESCUE clinical trial, per the terms of the MTEC arrangement.

No such arrangement existed in 2019.

Grant income is recognized as earned based on contract work performed.

Grant income amounts can vary greatly from period to period depending on the funding and work performed.

Grant income decreased in year ended December 31, 2020 compared to year ended December 31, 2019 primarily due to a grant awarded during 2019, and completed the middle of 2020, for development of ARP-1536.

No new grants were awarded during 2020.

Change in fair value of convertible promissory notes

Gain upon extinguishment of debt

Interest income

Interest income for the years ended December 31, 2020 and 2019, reflects interest earned on short term money market instruments.

The net proceeds from our underwritten public offering in June 2018, sale of Company stock and payments received in conjunction with the execution of the Gossamer License Agreement in June 2018 and Amendment No.

1 in May 2020, less cash used in operations, were available for investment.

The decrease in interest income in the year ended December 31, 2020 was due primarily to lower interest rates compared to prior year.

Interest expense

Total other income (expense)

Other income (expense), net for the year ended December 31, 2021 , were $1.1 million of income, compared to $0.9 million of expense for the year ended December 31, 2020.

The change was primarily driven by an increase of $1.7 million of non-cash income related to the change in fair value of the convertible promissory notes and a $0.2 million gain recognized on the extinguishment of the Paycheck Protection Program loan forgiven by the Small Business Administration in April 2021 .

Liquidity and Capital Resources

Since inception, we have incurred significant net losses and negative cash flows from operations.

For the years ended December 31, 2020 and 2019, we had net losses of $4.3 million and $23.3 million, respectively.

At December 31, 2020 and 2019, we had an accumulated deficit of $146.6 million and $142.2 million, respectively.

At December 31, 2020, we had cash and cash equivalents of $42.6 million.

To date, we have financed our operations principally through private and public offerings of our equity securities, private placements of our redeemable convertible preferred stock, common stock, issuances of secured convertible promissory notes and proceeds from the Amended Gossamer License Agreement and Amendment No.

Based on our current plans , we expect that our existing cash and cash equivalents, will enable us to conduct our planned operations through the fourth quarter of 2022.

In February 2018, we filed a shelf registration statement on Form S-3 with the SEC which was declared effective by the SEC on April 11, 2018 (the “Form S-3”).

The shelf registration statement allows us to sell from time-to-time up to $150.0 million of common stock, preferred stock, debt securities, warrants, or units comprised of any combination of these securities, for our own account in one or more offerings.

The shelf registration statement is intended to provide us flexibility to conduct registered sales of our securities, subject to market conditions and our future capital needs.

The terms of any offering under the shelf registration statement will be established at the time of such offering and will be described in a prospectus supplement filed with the SEC prior to the completion of any such offering.

Additionally, on February 21, 2018, and pursuant to the Form S-3, we entered into a Controlled Equity Offering Sales Agreement (the “Sales Agreement”) with Cantor Fitzgerald & Co.

(“Cantor”), pursuant to which we may issue and sell, from time to time, shares of our common stock having an aggregate offering price of up to $75.0 million through Cantor as our sales agent.

Cantor may sell our common stock by any method permitted by law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act, including sales made directly on or through the Nasdaq Capital Market or any other existing trade market for our common stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to prevailing market prices, or any other method permitted by law.

The shares of our common stock to be sold under the Sales Agreement will be sold and issued pursuant to the Form S-3 and the related prospectus and one or more prospectus supplements.

We will pay Cantor 3.0% of the aggregate gross proceeds from each sale of shares of common stock under the Sales Agreement.

During the year ended December 31, 2020, 6,523,655 shares of common stock had been sold under this Sales Agreement and received net proceeds of $9.3 million, after deducting expenses of approximately $403,000 (including sales agent compensation of approximately $292,000) that were direct and incremental to the sale of the Company’s common stock.

In January 2021, the Company initiated a process to explore a range of strategic alternatives focused on maximizing stockholder value from our clinical assets and cash resources.

There can be no assurance that this exploration of strategic alternatives will result in the Company entering or completing any transaction.

Ladenburg Thalmann & Co.

and Duane Nash, M.D., J.D., M.B.A, have been retained with respect to the strategic review process.

We could potentially use our available financial resources sooner than we currently expect, and we may incur additional indebtedness to meet future operation liquidity.

We continuously evaluate our needs for additional capital and consider opportunities on an ongoing basis, including capital from many different sources including equity capital, strategic alliances, business development debt, collaborations and business combinations.

Adequate additional funding may not be available to us on acceptable terms or at all.

Market volatility resulting from COVID-19 or other factors could also adversely impact our ability to access capital as and when needed.

In addition, although we anticipate being able to obtain additional financing through non-dilutive means, we may be unable to do so.

Our failure to raise capital as and when needed could have significant negative consequences for our business, financial condition and results of operations.

We have incurred net losses in each year since inception and as of December 31, 2021, we had an accumulated deficit of $142.7 million.

Our net losses were $110.1 million and $3.5 million for the years ended December 31, 2021 and 2020, respectively.

Additionally, during the year ended December 31, 2021, we recognized a non-cash impairment charge of $74.2 million on the contract intangible asset acquired in the Merger.

We expect to continue to incur significant expenses and operating losses for the foreseeable future due to the cost of research and development, including identifying and designing product candidates and conducting preclinical studies and clinical trials, and the regulatory approval process for our product candidates.

We expect our expenses, and the potential for losses, to increase substantially as we conduct clinical trials of FYARRO, seek to expand our pipeline, and operate as a public company.

From inception through December 31, 2021, we received funding of $25.4 million from our initial seed financing and the sale of Series A convertible preferred stock, $9.1 million from the issuance of convertible promissory notes, $145.4 million, net from the PIPE Financing in connection with the Merger and $29.7 million of cash assumed in the Merger.

As of December 31, 2021, we had $149.0 million of cash and cash equivalents.

Based on our current plans, we believe our existing cash and cash equivalents will enable us to conduct our planned operations into 2024.

The following table summarizes our cash flows for the years presented:

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Net cash used in operating activities

Net cash used in investing activities

Net cash provided by investing activities

Net cash provided by financing activities

Net increase (decrease) in cash and

cash equivalents

Net increase (decrease) in cash and cash equivalents

Operating Activities

We have historically experienced negative operating cash outflows as we developed razuprotafib and our pipeline programs.

Our net cash used in operating activities primarily results from our net loss adjusted for non-cash expenses, changes in working capital components, amounts due to contract research organizations to conduct our clinical programs and employee-related expenditures for research and development and general and administrative activities.

Our cash flows from operating activities will continue to be affected by spending to advance and support our product candidates in the clinic and other operating and general administrative activities.

For the year ended December 31, 2020 , operating activities used $ 5.4 million in cash primarily as a result of a net loss of $ 4.3 million , which includes $15.0 million of revenue earned from Amendment No.

1 to the Gossamer License Agreement , offset by $ 2.5 million in working capital and $ 1.4 million in non-cash expenses related to stock-based compensation and depreciation expense.

We do not expect revenue will reoccur unless milestones outlined in the Gossamer License Agreement are achieved.

For the year ended December 31, 2019, operating activities used $23.9 million in cash primarily as a result of the net loss of $23.3 million offset by $1.9 million in working capital and $1.3 million in non-cash expenses related to stock-based compensation and depreciation expense.

For the year ended December 31, 2021, cash used in operating activities was $22.4 million and resulted from (i) our net loss of $110.1 million offset by non-cash adjustments totaling $75.4 million, which was primarily related to impairment of the acquired contract intangible asset of $74.2 million, and (ii) a $12.3 million net increase in our working capital accounts, primarily driven by the receipt of the $14.0 million upfront payment from EOC under the EOC License Agreement.

For the year ended December 31, 2020, cash used in operating activities was $12.7 million and resulted from (i) our net loss of $3.5 million, and (ii) a $10.5 million net decrease in our working capital accounts, offset by (ii) $1.3 million in non-cash expenses related to interest expense on convertible promissory notes, stock-based compensation expense, lease expense and depreciation and amortization expense.

Investing Activities

Net cash used in investing activities for the years ended December 31, 2020 and 2019 was related to capital expenditures to support operations.

Cash provided by investing activities for the year ended December 31, 2021 related to cash acquired in connection with the Merger partially offset by transaction related expenses and purchases of property and equipment .

There were no investing activities for the year ended December 31, 2020 .

Financing Activities

Net cash provided by financing activities for the year ended December 31, 2020 includes $9.3 million net proceeds from the sale of our common stock sold under the Sales Agreement with Cantor.

No such activity occurred in 2019.

Cash provided by financing activities for the year ended December 31, 2021 includes $155.0 million gross cash proceeds from our PIPE Financing and $0.8 million from exercise of stock options, partially offset by $9.6 million of issuance costs related to the PIPE Financing, and $4.4 million of dividends paid to preferred stockholders.

Net cash provided by financing activities for the year ended December 31, 2020 includes $1.0 million related to the issuance of convertible promissory notes and $0.2 million related to proceeds from our PPP Loan.

Contractual Obligations and Commitments

During 2019, the Company leased 7,580 square feet of office space in Cincinnati, Ohio, 4,000 square feet of office space in Lexington, Massachusetts and 687 square feet of office space in Dexter Michigan.

During the fourth quarter of 2019, the Company terminated the Lexington and Dexter leases, without penalty.

The Cincinnati property lease includes one month of free rent, escalating rent payments and expires in July 2021.

Total rent expense for all operating leases was $0.2 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively.

We also have contracts with various organizations to conduct research and development activities, including clinical trial organizations to manage clinical trial activities.

In August 2021, we entered into an amendment to extend the lease of our 2,760 square feet of office space in Pacific Palisades, California.

We exercised an option, under our prior lease agreement, to extend the term of the lease for an a dditional three-year period.

Included in the renewal were nine months of rent abatement and a rent escalation clause.

Rent expense is being recorded on a straight- line basis.

Rent expense related to this lease was $0.2 million for each of the years ended December 31, 2021 and December 31, 2020.

On April 9, 2014, we entered into a license agreement (the “Celgene License Agreement”) with Celgene for exclusive rights for certain patents and a non-exclusive license for certain technology and know-how pertaining to FYARRO.

On November 15, 2019, we entered into an amendment to the Celgene License Agreement (“Amended Celgene License Agreement”) to terminate certain of Celgene’s FYARRO product supply obligations and to transfer control over certain regulatory filings under the original Celgene License Agreement to us.

This amendment also waived the obligations related to certain development milestone payments and waived the liability related to 2016 and 2017 licensed drug manufacturing costs.

On August 30, 2021, we entered into Amendment No.

1 (the “Amendment”) to the Amended Celgene License Agreement related to certain intellectual property rights of Celgene pertaining to the compound known as FYARRO.

Celgene is entitled to receive certain development milestone payments, royalties on net sales from licensed products under the agreement and any sublicense fees.

On December 8, 2020, we entered into a license agreement (“EOC License Agreement”) with EOC Pharma (Hong Kong) Limited (“EOC”) for the rights and licenses granted to EOC by us for the further development and commercialization of FYARRO in the People’s Republic of China, Hong Kong Special Administration Region, Macao Special Administrative Region and Taiwan (the “Licensed Territory”).

In accordance with the Celgene License Agreement, we are required to pay 20% of all sublicense fees to Celgene.

On January 13, 2022, we entered into a Negotiated Purchase Order Terms and Conditions for Clinical and Commercial Product (the “Fresenius Agreement”) with Fresenius Kabi, LLC (“Fresenius Kabi”) pursuant to which Fresenius Kabi will manufacture FYARRO for us, and we will purchase FYARRO as a finished drug product from Fresenius Kabi, on a purchase-order basis.

Under the Agreement, which shall be effective through December 22, 2022 (or such later date as may be agreed between the parties in writing and currently being discussed), we may purchase FYARRO for either clinical or commercial purposes for use in the United States and Canada.

In addition to manufacturing, Fresenius Kabi will perform specified labeling, packaging and serialization activities in respect of FYARRO for our benefit.

The price of FYARRO will be fixed, subject to the ability of Fresenius Kabi to increase pricing under specified circumstances.

We have an obligation to purchase certain minimum quantities of FYARRO.

Failure to purchase those minimum quantities will result in an additional payment from us to Fresenius Kabi.

We also have contracts with various organizations to conduct research and development activities, including clinical trial organizations to manage clinical trial activities and manufacturing companies to manufacture the drug product used in the clinical trials.

The scope of the services under these research and development contracts can be modified and the contracts cancelled by us upon written notice.

In the event of a cancellation, we would be liable for the cost and expenses incurred to date as well as any close out costs of the service arrangement.

Off-Balance Sheet Arrangements

As of December 31, 2020 and 2019, we did not have any off-balance sheet arrangements as defined by applicable SEC regulations.

With respect to our obligations under the CVR Agreement, certain events specified in the CVR Agreement need to occur for us to receive funds, and it is currently uncertain whether any funds will be received under the CVR Agreement.

We do not have any commitment or obligation under the CVR Agreement unless and until funds are received.

Critical Accounting Policies and Estimates

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While our significant accounting policies are described in more detail in the notes to our consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Merger and Acquired Contractual Intangible Asset

Aerpio issued common stock in the Merger based on the terms of the Merger Agreement.

For accounting purposes, however, we concluded under GAAP that Private Aadi has acquired Aerpio.

We based this conclusion having evaluated the terms of the Merger Agreement and other factors including:

(i) the stockholders of Private Aadi owned approximately 66.8% of the voting rights of the Company as of immediately following the Merger (but prior to the PIPE Financing);

(ii) three (3) of seven (7) members of the board of directors of the Company post-Merger were composed of directors designated by Private Aadi under the terms of the Merger Agreement, and one (1) member of the board of directors of the Company post-Merger was a director mutually designated by Private Aadi and Aerpio;

(iii) existing members of Private Aadi’s management became the management of the Company post-Merger;

(iv) the PIPE Investors consist of individuals and funds, and for purpose of this analysis, while they owned approximately 55.6% on a fully-diluted basis, as of immediately following the Merger (and after giving effect to the PIPE Financing), no one individual or fund held more shares than the holders of Private Aadi collectively owned immediately following the Merger and they are not considered to be a single voting group;

and (v) following the Merger, the Company is headquartered in Pacific Palisades, California, and all ongoing operations of the combined company are those of Private Aadi.

Further, under GAAP we have accounted for the Merger as a reverse asset acquisition rather than a business combination.

Accounting as an asset acquisition is significantly different than the accounting for a merger transaction as a business combination.

Among other things, we have not recognized any goodwill on our consolidated balance sheet as there may have been had the Merger been accounted for as a business combination.

A central element to the accounting model conclusion is the determination of whether a business or an asset or a group of assets is acquired.

A business is defined in ASC 805, Business Combinations, as an integrated set of inputs and processes that are capable of generating outputs that have the ability to provide a return to its investors or owners.

Typical inputs include long-lived assets (including intangible assets or rights to use long-lived assets), intellectual property and the ability to obtain access to required resources.

Typical processes include strategic, operational and resource management processes that are typically documented or evident through an organized workforce.

We considered all of the above factors when determining whether a business was acquired in the Merger and concluded that Aerpio did not meet the definition of a business.

Upon closing of the Merger, substantially all of the fair value is concentrated in cash, working capital and a long-lived contract intangible asset related to Aerpio’s license agreement with Gossamer Bio.

Inc., under which 90% of any future net cash proceeds will be remitted to CVR Holders and paid through the CVRs.

In accordance with GAAP for asset acquisitions, the excess purchase price over the fair value of the acquired assets and liabilities ($78.1 million) was ascribed to the acquired contract intangible asset.

However, due to the significant excess purchase price being allocated over the fair value of the acquired contractual intangible asset, we determined that an indicator of impairment was present, and we assessed the contract intangible asset as compared to expectations of contingent future cash flows.

We concluded that our estimate of gross cash flows potentially accruing to us under the license agreement is likely to be less than the excess purchase price of the fair value of the acquired assets and liabilities ascribed to the acquired contract intangible asset.

As a result, we performed a valuation of the acquired contract intangible asset and recognized an impairment of $74.2 million to adjust the carrying amount of the contractual intangible asset to its estimated fair value of $3.9 million.

The license agreement with Gossamer Bio.

includes potential payments to us in the event of certain development and commercialization milestones and sales-based royalties.

Our fair value determination of the intangible asset utilized a scenario-based, risk-adjusted, discounted cash flow model with respect to the potential development milestone payments and a Monte Carlo option-pricing model with respect to the sales-based milestone and royalty payments:

We determined fair value of the potential development milestone payments under the license agreement with inputs based on certain subjective assumptions, including (a) the probability of clinical success determined with reference to various academic studies reporting probabilities of approval for clinical trials;

(b) an estimate of the time to achievement of the clinical milestones;

and (c) a counterparty credit risk premium determined with reference to the borrowing costs of a benchmark group of comparable market participants.

Application of the Monte Carlo simulation model in valuing the potential sales-based milestone and royalties involves making assumptions for (a) the probability of clinical success determined with reference to various academic studies reporting probabilities of approval for clinical trials;

(b) our forecast of potential revenues, revenue uptake rate and the period of time from a prospective commercial launch to peak sales, and an estimate of peak sales for each successfully commercialized product covered under the license agreement;

(d) a counterparty credit risk premium determined with reference to the borrowing costs of a benchmark group of comparable market participants;

and (e) a revenue metric risk premium determined with reference to a long-term risk-free rate, a weighted-average cost of capital, revenue volatility and asset volatility.

Research and Development Costs

We incur substantial expenses associated with clinical trials.

Accounting for clinical trials relating to activities performed by CROs and other external vendors requires us to exercise significant estimates in regard to the timing and accounting for these expenses.

We estimate costs of research and development activities conducted by service providers, which include, the conduct of preclinical studies, contract manufacturing activities and clinical activities.

The diverse nature of services being provided under CRO and other vendor arrangements, the different terms and milestone arrangements that exist for each type of service and the lack of timely information related to certain clinical activities complicates the estimation of accruals for services rendered by CROs and other vendors in connection with clinical trials.

We record the estimated costs of research and development activities based upon the estimated amount of services provided but not yet invoiced and include these costs in the accrued and other current liabilities or prepaid expenses, as applicable, on the balance sheets and within research and development expense on the consolidated statements of operations.

In estimating the duration of a clinical study, we evaluate the start-up, treatment and wrap-up periods, payment arrangements and services rendered attributable to each clinical trial and fluctuations are regularly tested against payment plans and trial completion assumptions.

We estimate these costs based on factors such as estimates of the work completed and budget provided and in accordance with agreements established with our collaboration partners and third-party service providers.

We make significant judgments and estimates in determining the accrued liabilities and prepaid expense balances in each reporting period.

As actual costs become known, we adjust our estimates and related accounts on the balance sheet.

We have not experienced any material differences between accrued costs and actual costs incurred since our inception.

Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and CROs that may be used to conduct and manage clinical trials on our behalf.

We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity.

If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.

Revenue Recognition

At the inception of an arrangement, the Company evaluates if a counterparty to a contract is a customer, if the arrangement is within the scope of revenue from contracts with customers guidance and the term of the contract.

The Company recognizes revenue when its customer obtains control of promised goods or services in a contract for an amount that reflects the consideration the Company expects to receive in exchange for those goods or services.

For contracts with customers, the Company applies the following five-step model in order to determine this amount:

(i) identification of the promised goods or services in the contract;

(ii) determination of whether the promised goods or services are performance obligations, including whether they are distinct in the context of the

(iii) measurement of the transaction price, including the constraint on variable consideration;

(iv) allocation of the transaction price to the performance obligations;

and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.

The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

As part of the accounting for contracts with customers, the Company must develop assumptions that require judgment to determine the standalone selling price of each performance obligation identified in the contract.

The Company then allocates the total transaction price to each performance obligation based on the estimated standalone selling prices of each performance obligation.

The Company recognizes the amount of the transaction price as revenue that is allocated to the respective performance obligation when the performance obligation is satisfied or as it is satisfied.

The Company enters into collaboration arrangements, under which it licenses certain rights to its intellectual property to third parties.

The terms of these agreements may include payment to the Company of one or more of the following:

nonrefundable upfront license fees;

development, sale and commercial milestone payments and royalties on net sales of licensed products.

Each of these types of payments are classified as license revenue except for revenue from royalties on net sales of licensed products, which are classified as royalty revenue.

For each collaboration agreement that results in revenues, the Company identifies all material promised goods and services, which may include a license to intellectual property, research and development activities and/or transition activities.

Promised goods or services are considered to be separate performance obligations if they are distinct.

In order to determine the transaction price to be allocated to each performance obligation, in addition to any upfront payment, the Company estimates the amount of variable consideration at the outset of the contract either utilizing the expected value or most likely amount method, depending on the facts and circumstances relative to the contract.

The Company constrains (reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue will not occur throughout the life of the contract.

When determining if variable consideration should be constrained, management considers whether there are factors outside the Company’s control that could result in a significant reversal of revenue.

In making these assessments, the Company considers the likelihood and magnitude of a potential reversal of revenue.

These estimates are re-assessed each reporting period as required.

Once the estimated transaction price is established, amounts are allocated to the performance obligations that have been identified.

The transaction price is generally allocated to each separate performance obligation on a relative standalone selling price basis.

The Company must develop assumptions that require judgment to determine the standalone selling price (“SSP”) in order to account for these agreements.

To determine the standalone selling price the Company’s assumptions may include (i) assumptions regarding the probability of obtaining marketing approval for the drug candidate;

(ii) estimates regarding the timing of and the expected costs to develop and commercialize the drug candidate;

(iii) estimates of future cash flows from potential product sales with respect to the drug candidate;

and (iv) appropriate discount and tax rates.

Standalone selling prices used to perform the initial allocation are not updated after contract inception.

The Company does not include a financing component to its estimated transaction price at contract inception unless it estimates that certain performance obligations will not be satisfied within one year.

Upfront License and Amendment License Fees:

If a license to the Company’s intellectual property is determined to be distinct from the other performance obligations identified in the arrangement, the Company recognizes revenues from nonrefundable, upfront license and amendment license fees based on the relative value prescribed to the license compared to the total value of the arrangement.

The revenue is recognized when the license is transferred to the collaborator and the collaborator is able to use and benefit from the license.

For licenses that are not distinct from other obligations identified in the arrangement, the Company utilizes judgment to assess the nature of the combined performance obligation to determine whether the combined performance obligation is satisfied over time or at a point in time.

If the combined performance obligation is satisfied over time, the Company applies an appropriate method of measuring progress for purposes of recognizing revenue from nonrefundable, upfront license fees.

The Company evaluates the measure of progress each reporting period and, if necessary, adjusts the measure of performance and related revenue recognition.

Development Milestone Payments:

Depending on facts and circumstances, the Company may conclude it is appropriate to include the milestone in the estimated transaction price using the most likely amount method or it is appropriate to fully constrain the milestone.

A milestone payment is included in the transaction price in the reporting period the Company concludes that it is probable that recording revenue in the period will not result in a significant reversal in amounts recognized in future periods.

The Company may record revenues from certain milestones in a reporting period before the milestone is achieved if the Company concludes that achievement of the milestone is probable and that recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods.

The Company records a corresponding contract asset when this conclusion is reached.

Milestone payments that have not been included in the transaction price to date are fully constrained.

These milestones remain fully constrained until the Company concludes that achievement of the milestone is probable and recognition of revenue related to the milestone will not result in a significant reversal in amounts recognized in future periods.

The Company re-evaluates the probability of achievement of such development milestones and any related constraint each reporting period.

The Company adjusts its estimate of the overall transaction price, including the amount of collaborative revenue that it has recorded, if necessary.

Sales-based Milestone and Royalty Payments:

The Company’s collaborators may be required to pay the Company sales-based milestone payments or royalties on future sales of commercial products.

The Company recognizes revenues related to sales-based milestone and royalty payments upon the later to occur of (i) achievement of the collaborator’s underlying sales or (ii) satisfaction of any performance obligation(s) related to these sales, in each case assuming the license to the Company’s intellectual property is deemed to be the predominant item to which the sales-based milestones and/or royalties relate.

Prepaid and Accrued Research and Development Expenses

As part of the process of preparing our consolidated financial statements, we are required to estimate our prepaid and accrued research and development expenses.

This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost.

The majority of our service providers invoice us monthly in arrears for services performed.

We make estimates of our prepaid and accrued research and development expenses as of each consolidated balance sheet date in our consolidated financial statements based on facts and circumstances known to us at the time.

We confirm the accuracy of estimates with the service providers and make adjustments if necessary.

Examples of estimated prepaid and accrued research and development expenses include expenses for:

CROs in connection with clinical studies;

Investigative sites in connection with clinical studies;

Vendors in connection with preclinical development activities;

Vendors related to product manufacturing, development and distribution of clinical materials.

We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies on our behalf.

The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows.

The scope of services under these contracts can be modified and some of the agreements may be cancelled by either party upon written notice.

There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense.

Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical study milestones.

In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period.

If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly.

Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, we may report amounts that are too high or too low in any particular period.

To date, there have been no material differences between our estimates and amounts actually incurred.

We account for revenue related to the EOC License Agreement and Grant Revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”).

Under ASC 606, we recognize revenue when the defined customer, under ASC 606, transfers promised goods or services in an amount that reflects the consideration

to which we expect to be entitled in exchange for goods or services.

To determine revenue recognition for contracts with customer s, we perform the following five steps:

(i) identif y the promised goods or services in the contract;

(ii) identif y the performance obligation in the contract, including whether they are distinct in the context of the contract;

(iii) determine the transaction price, including the constraint on variable consideration;

(iv) allocate the transaction price to the performance obligations in the contract;

and (v) recognize revenue when (or as) we satisf y the performance obligation.

W e recognize revenue when our customer obtains control of promised goods or services in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services.

We only apply the five-step model to contracts when it is probable that we will collect consideration to which we are entitled in exchange for the goods or services we transfer to the customer.

Stock‑Based Compensation

We issue stock-based awards generally in the form of stock options and restricted stock.

We account for our stock-based compensation awards in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 718, Compensation—Stock Compensation , (“ASC 718”).

ASC 718 requires all stock-based payments to employees, including grants of employee stock options and restricted stock and modifications to existing stock awards to be recognized in the consolidated statements of operations and comprehensive loss based on their fair values.

Described below is the methodology we have utilized in measuring stock-based compensation expense.

We estimate the fair value of our options to purchase shares of common stock to employees using the Black-Scholes option pricing model, which requires the input of highly subjective assumptions, including (a) the expected stock price volatility, (b) the calculation of the expected term of the award, (c) the risk-free interest rate and (d) expected dividends.

Due to the lack of a public market for the trading of our common stock and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded.

The historical volatility is calculated based on a period of time commensurate with the expected term assumption.

The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to our company, including stage of product development and life science industry focus.

We are a development stage company in an early stage of product development with no revenues and the representative group of companies has certain similar characteristics.

We believe the group selected has sufficient similar economic and industry characteristics and includes companies that are most representative of our company.

We use the simplified method as prescribed by the SEC Staff Accounting Bulletin No.

107, Share-Based Payment, to calculate the expected term for options granted to employees and non-employees as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term.

We recognize all stock-based payments to employees, including grants of employee stock options in the consolidated statements of operations and comprehensive loss based on their fair values.

All of our share-based awards, to employees, non-employees, officers, and directors, are subject only to service-based vesting conditions.

We estimate the fair value of its stock-based awards using the Black-Scholes option pricing model, which requires the input of assumptions, including (i) the expected stock price volatility, (ii) the calculation of expected term of the award, (iii) the risk-free interest rate based on the U.S.

Treasury yield in effect at the time of the grant for zero-coupon U.S.

treasury notes with maturities approximately equal to the expected term of the stock options and (iv) expected dividends.

Options granted during the year have a maximum contractual term of ten years.

Forfeitures are recognized and accounted for as they occur.

Due to the historical lack of a public market for the trading of our common stock and a lack of company-specific historical and implied volatility data, we have based our estimate of expected volatility on the historical volatility of a group of similar companies that are publicly traded.

The computation of expected volatility is based on the historical volatility of a representative group of companies with similar characteristics to ours, including stage of product development and life science industry focus.

We believe the group selected has sufficient similar economic and industry characteristics and includes companies that are most representative of us.

We have limited historical stock option activity and therefore estimate the expected term of stock options granted to employees, officers, and directors using the simplified method, which represent the average of the contractual term of the stock option and its weighted-average vesting period, to calculate the expected term, as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term for options granted to employees, and utilize the contractual term for options granted to non-employees.

The expected term is applied to the stock option grant group as a whole, as we do not expect substantially different exercise or post-vesting termination behavior among our employee population.

The risk-free interest rate is based on a treasury instrument whose term is consistent with the expected life of the stock options.

The expected dividend yield is assumed to be zero as we have never paid dividends and have no current plans to pay any dividends on our common stock, similar to our peer group.

The grant date fair value of restricted stock award grants is based on the estimated value of our common stock at the date of grant.

Our stock-based awards are subject to service-based vesting conditions.

Compensation expense related to awards to employees with service-based vesting conditions is recognized on a straight-line basis based on the grant date fair value over the associated service period of the award.

Awards to non-employees are adjusted through share-based compensation expense as the award vests to reflect the current fair value of such awards and are expensed using an accelerated attribution model.

For the years ended December 31, 2020 and 2019, stock-based compensation expense was $1.3 million and $1.1 million, respectively.

As of December 31, 2020, we had $1.5 million of total unrecognized stock-based compensation costs for stock options, which we expect to recognize over a weighted-average period of 1.66 years.

Compensation expense related to awards to employees is calculated on a straight-line basis by recognizing the grant date fair value over the associated service period of the award, which is generally the vesting term.

For the years ended December 31, 2021 and December 31, 2020, we recognized stock‑based compensation expense, net of estimated forfeitures, in the statements of operations and comprehensive loss as follows (amounts in thousands):

Year Ended December 31,

Research and development

General and administrative

As of December 31, 2021, total unamortized stock‑based compensation was $22.1 million which we expect to recognize over a weighted average period of 2.9 years.

The intrinsic value of all outstanding stock options as of December 31, 2021 was $10.0 million.

We have accounted for income taxes using the asset and liability method.

Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates applicable to taxable income in the years in which those temporary differences are expected to be recovered or settled.

The effect on deferred tax

assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

A valuation allowance against deferred tax assets is recorded if, based upon the weight of all available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized .

When uncertain tax positions exist, we recognize the tax benefit of tax positions to the extent that the benefit will more likely than not be realized.

The determination as to whether the tax benefit will more likely than not be realized is based upon the technical merits of the tax position, as well as consideration of the available facts and circumstances.

We recognize interest and penalties related to uncertain tax positions, if any exist, in income tax expense.

During the years ending December 31, 2021 and 2020, we recognized state tax payments as income tax expense on the statement of operations and comprehensive loss.

Since our formation in 2011, we have not recorded any U.S.

federal or state income tax benefits for the net losses we have incurred in each year or our earned tax credits, due to our uncertainty of realizing a benefit from those items.

Due to our lack of earnings history and uncertainties surrounding our ability to generate future taxable income, the net deferred tax assets have been fully offset by a valuation allowance.

The deferred tax assets were primarily comprised of federal and state tax net operating losses (“NOL”).

Pursuant to Section 382 and 383 of the Internal Revenue Code (“IRC”), utilization of our NOL carryforwards and research and development credits may be subject to annual limitations in the event of any significant future changes in our ownership structure.

These annual limitations may result in the expiration of NOL carryforwards and research and development credits prior to utilization.

As of December 31, 2021, we have completed an IRC Section 382 analysis through the date of the Merger.

Ownership changes were identified that will result in annual limitations on future utilization of NOLs and research and development credit carryforwards.

To the extent such limitations will cause NOL and R&D credit carryforwards to expire unused, these tax attributes have been removed from deferred tax assets.

As of December 31, 2021, we have federal and state net operating loss carryforwards of approximately $150.9 million and $55.8 million, respectively.

We also have federal and state research credit carryforwards of approximately $3.1 million and $1.7 million, respectively, as of December 31, 2021.

Ownership changes may occur in the future which can result in future limitations of the available NOL and R&D credit carryforwards.

JOBS Act Accounting Election

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Item 7. Management’s Discussion and Analysis